Types of Forex Brokers

There are three major types of forex brokers differentiated by the way they operate. Dealing desks brokers try to group the trades together and not send through small individual trades to the market the way STP brokers do. The aim is to save on the broker’s transaction costs. This is something that the tourist agency does when they assemble a tourist group to Hawaii instead of selling the tours individually.

The dealing desks have an option not to hedge the customer. Only in that case the trader “losing” means the broker is “winning”. However, reputable regulated brokers customarily hedge their customer trades. Even unregulated brokers will not hunt stops and try to make you lose. They don't bother. They know that many forex beginners will beat themselves without any help.

There are numbers of benefits to dealing desk brokers such as no delay in execution and no re-quotes. Therefore, it is not a simple black and white issue and there is no absolute advantage of the non-dealing desk brokers despite what many forex advising sites have to say about it.

As far as the USA based companies are concerned, the accusation that dealing desk brokers manipulate the quotes is absolutely untrue. Every regulated broker is controlled by a system called FORTRESS (Forex Transaction Reporting Execution Surveillance System) implemented by the CFTC and NFA.

The system logs every single trade by every single customer and the time it was executed. The files are submitted nightly to the regulators. The dealing desk brokers which are manipulating the prices will be easily spotted by the system and the brokers would be disciplined or even closed by the NFA.

STP Brokers(Straight Through Processing): make money via spreads on the FX exchange from the interbank market.Client orders are received then marked up a few PIPs before being routed straight through to liquidity providers - banks and hedge funds. Therefore, although this broker, most of the time, displays its own quotes, they are correlated to the actual inter-banking quotes.

In the real life the broker sends your orders to the market but sometimes it doesn’t. For example, successful forex traders or successful trading schemes are automatically routed to the market whereas small or losing traders are not.

This is a way to profit twice: once by clients’ losses and another by not losing money to successful traders. Of this never works 100% but statistically it is a winning game for the brokers.

In short , the STP broker’s profit comes from unsuccessful clients and commission arbitrage on the routed orders. Are you surprised ? Well, if the brokers always lose, why bother ? And again this is why they are able to offer you such a great service and the fact they win when you lose helps them to provide it.

ECN (Electronic Communications Network) Brokers: make money via commissions charged on a transaction, not on spreads and trading against their clients. Client orders are received and internally bidding up and offering with banks, market markers and individual traders.

In effect, all these participants trade against each other. Your broker does not trade against you. Does it make such a big difference? Remember the rest of the world trades against you anyway.

In any case providing a marketplace, these brokers charge commissions on your transactions. So their best interest is to make you trade as long as you can, so their commissions are continuous.However the key variable is the commission rate. They may charge more than you won, especially if you are forex beginner and your account is small.

You've got to shop around for the best rates and figure out if you your trading system has any chance of making money with these commission charges. Everyone has a different trading system that suits to his/her traits.

The drawback of the ECN brokers are their trading platforms. They might not be very user-friendly. If you are a forex beginner you need to practice to get used to them. If you are an experienced trader, this issue should not be a problem for you.

The ECN and STP brokers are often called NDD (non-dealing desk) brokers. Nowadays, the boundaries between the STP and ECN brokers are blurry. There are many hybrid model brokers who are both ECN and STP or sometimes called the ECN+STP brokers. In this case the brokers may charge spreads and transactions as well. However, contrary to what many forex review sites try to say, reputable brokers never want you to lose. As opposed to that, they want you to win, increase your deposit and stay with them. As long as you stay with them, they will keep making money on the spreads and transactions. If you lose and quit, they lose the client.

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